Ofgem gives final verdict on capacity market rule changes

Ofgem has given its final verdict on whether or not to enact a series of proposed capacity market rule changes following the conclusion of a consultation.

The regulator assessed a total of 116 amendments – four suggested by itself and the rest by industry stakeholders.

Ofgem initially decided to take forward 38 and give further consideration to 13 more.

Based on feedback from stakeholders, the regulator is now planning to proceed with just 32 of the submissions but still intends to mull over another 13.

Here’s a round-up of some of the most interesting proposals:

Participation by renewables – CP263, CP313 and CP314 – consider further

Innogy and Eon put forward a total of three proposals to allow renewables which are not in receipt of low-carbon subsidies to participate in the capacity market.

CP263 (Eon) and CP314 (Innogy) would do so by creating specific generating classes for technologies such as solar, onshore wind and offshore wind, whilst CP313 (Innogy) would create an all-encompassing category of “other technologies”.

Ofgem agreed it should be a “long-term goal” for the capacity market to include renewables, but said there are technical hurdles to overcome which require further examination.

For example, National Grid already has a methodology for establishing wind de-rating factors, which are used when determining the procurement targets for capacity auctions.

However, Ofgem said this methodology may only be appropriate for modelling the renewables fleet as a whole and makes no distinction between onshore and offshore wind.

The regulator said de-rating factors may instead need to be set on a regional or a project-by-project basis as “wind output in a stress event is also likely to vary by location”.

Ofgem said it would also need to consider how the penalty regime, developed with dispatchable generation in mind, would be applied to intermittent renewables.

The regulator said these concerns would be best examined as part of the five-year review of the capacity market, which energy and clean growth minister Claire Perry has confirmed is taking place during 2018.

Secondary trading – CP247 and CP343 – take forward

Alkane Energy and Welsh Power submitted proposals to expand the eligibility criteria for secondary trading of capacity agreements. At the moment contracts can only be transferred to capacity market units which prequalified for the relevant delivery year but subsequently failed to secure an agreement.

CP247 (Alkane Energy) would extend eligibility to units which did not prequalify for the auction but later met all of the prequalification criteria. Meanwhile, CP343 (Welsh Power) would allow recently commissioned, non-contracted, existing capacity market units to register for secondary trading once they have proven their ability to deliver capacity.

Ofgem has decided to proceed with the proposals on the basis they would increase the liquidity of secondary trading and reduce the risk of non-delivery to the benefit of consumers. The regulator said it intends to look into secondary trading as part of the five-year review of the capacity market.

Auction eligibility for existing generation – CP293 – take forward

Under CP293, put forward by EP UK Investments, existing generation which opted out of a T-4 auction on the understanding it would close by the first delivery year to be allowed to bid in the T-1 auction for that year.

Ofgem said the amendment would improve auction liquidity and market transparency, noting that plants can already retain the option of participating in the T-1 auction by opting out of the T-4 auction and stating they will remain operational, even if they expect to close.

The regulator said it is not concerned about the proposal increasing the risk of participants withholding capacity for the T-1 auction in order to game the system, as this is already possible under the current rules, which also provide an incentive for them to lie about their plans.

Ofgem said it intends to implement the amendment for all future T-1 auctions, including those corresponding with past T-4 auctions.

Information – CP270, CP271 and CP273 – take forward

EDF has submitted three proposals which would make changes regarding the information provided by the capacity market delivery body, National Grid, before, during and after auctions.

CP270 would require the capacity market register to include information on the connection capacity, de-rated capacity and technology type for each component making up a generating capacity market unit, whilst CP271 would require the register to include information on the nature of demand-side response (DSR), including whether or not it is derived from behind-the-meter generation.

Ofgem said the amendments would provide valuable information to market participants, benefit policy-making and result in better value for money for consumers.

However, it has also decided to delay the implementation of the proposals due to the changes which would need to be made to National Grid’s systems. The regulator said they would be introduced alongside one of its own proposals, OF12, which would require similar alterations.

CP273 would amend the way in which the excess capacity is communicated to participants during auctions. Currently the figure is rounded to the nearest 100MW in the T-1 auction, but EDF said it should be rounded to the nearest 1GW as happens in the T-4 auction.

Ofgem has decided to take forward an alternative version of the proposals which would give National Grid the authority to set the excess capacity parameter for each auction. It said this would allow the auctioneer to adjust the parameter in response to the specific characteristics of each auction and avoid the need for further rule changes in future.

Demand-side response components – OF12 – take forward

OF12 is one of the four proposals put forward by Ofgem itself and would allow the components which make a DSR capacity market unit to be altered during a delivery year. The regulator said the change would provide DSR aggregators with the flexibility they need to maintain the reliability of their portfolios.

As mentioned before, Ofgem has decided to delay implementation until next year to prevent disruption to upcoming auctions as it would require “fundamental” changes to National Grid’s systems, which would need to be “rebuilt”.